The private equity industry is being tarred and feathered with accusations that it is secretive, privileged and harmful to UK plc.

Brooks Newmark, Conservative MP, Braintree

Most of the industry would refute those accusations. But then why is the industry in the dock? It is there because of legitimate concerns about the way in which it has developed and expanded over the past few years.

But the industry is facing up to these concerns and it is quite right that there should be a debate about the challenges it faces and the opportunities that it continues to present.

Private equity should not be afraid of scrutiny and, indeed, it is not. I am pleased the UK Treasury Select Committee inquiry has provided a forum for these concerns to be examined in the context of the contribution the industry makes to the economy.

First is the vexed issue of transparency. When I began working in private equity, buying a £25m company was a big thing, but today billion-pound transactions are routine. As the industry has matured, it must meet the challenge of transparency.

But we must be careful not to overstate the problem. Private equity-backed companies are accountable to their shareholders in the same way as public companies. More so, in fact, because their shareholders tend to be more involved in management decisions and their investments are more long term.

Second, the industry must recognise that its success means it must reassess its role in the market to place a premium on corporate social responsibility. As it begins to acquire household names such as Alliance Boots, its attitude to staff and its responsibility to communities must be a prime consideration for fund managers. Nevertheless, the available evidence suggests that private equity takeovers create jobs in the medium and long term.

Third, the industry must get back to its roots in true venture capital by taking risks and investing in innovation, not just established brands. But we must be clear that private equity receives no special tax breaks. It uses the same tax reliefs available to all other businesses.

The issue is whether it is appropriate to consider wholesale reform of the tax system in order to counter a perceived unfairness. The UK Government needs to tread carefully before responding to the media clamour for changes to the tax system.

A knee-jerk response could cause considerable damage to the economy, and may well disproportionately impact smaller businesses that would not be able escape offshore or alter their capital structures quickly enough to soften the blow of any changes.

The Federation of Small Businesses and the Confederation of British Industry have warned the Treasury against scrapping taper relief.

As the deputy director of the CBI has said: “Tens of thousands of entrepreneurs and small businesses are creating jobs and prosperity in the UK because of the way capital gains tax and taper relief motivate and reward them for the risks they take.”

Some questions have recently been raised over whether taper relief should continue to apply to the carried interest held by private equity partners.

But carried interest is not, as some have asserted, an “income” bonus on a job well done and therefore subject to income tax.

Carried interest is a share of the capital gain made on a profitable investment and, as a result, is subject to capital gains tax and, if held for a minimum of two years, qualifies for taper relief.
Private equity should not continue to be made the scapegoat for Labour’s lurch to the left. The industry welcomes legitimate concern and scrutiny but not politically motivated scaremongering.

As the Economic Secretary told the House of Commons recently: “We should not demonise a particular sector but instead promote more long-term growth and job creation in our economy.” And that is precisely what the private equity industry offers.